UPDATE - what triggers

The excesses [housing and stock market bubbles] created by Greenspan will take quite some time to clear out. But what would trigger a collapse? - an earthquake hitting Tokyo city.

Historic experience from China indicates that in the event of an earthquake Richter scale 7.8 or above hitting key city of a country, that city would take more than ten years to rebuild. If it is a key financial centre, the impact would extend to the country as a whole.

The San Francisco bay area and LA are both vulnerable cities which would have global impacts if ruined by earthquakes. WHY? It is simply because the roads to eastern USA and ports may be blocked, logistics grind to a halt, consumer demand slackens in the biggest state which impacts USA and beyond. China's economy will run into a standstill because of cancelled orders from the US. Food and grain export will run into severe problems causing at least a short term famine on countries relying heavily on US grains.

If Tokyo and SF/LA got hit within a reasonably short period of time say a few months, then the impact on the global economy would be huge.

Key financial centres such as HK, NY and London must have well thought out plans to handle such contingencies, otherwise a global financial meltdown could occur.

UPDATE

Review the copper chart above, it topped out in May06. Why reading the copper chart - because it has most relevance to the global economy. Almost every industrial product needs copper for electrical supply, thus it is a lead indicator of industrial production and corp profits.

The lead time indicates falling results in most corporations within 6-9 months after peak which points to Nov-Feb. The copper chart indicates a fall to 1900 if it breaks through the 2900 mark with follow through.

After fancy period of IPOs and outsized bonuses this year at i-banks, 2007 looks dead beat in comparison. We already are seeing some layoffs here in HK before Xmas, so brace yourself for a rough ride ahead.

RETIREMENT

this is not an economic update. for young recipients, you may not be interested.

many of my friends ask me how much is enough to retire, what age to retire, what portfolio to carry?

since we all live different lifestyles, it is hard to give a meaningful estimate for all.

i summarize below my views on retirement planning.

reality check

first of all, you must not be renting a place to live unless you have a matching residence or properties that generate similar income if not more.

estimate your monthly expenses [property related and personal], x12 to become annual expenses, then x20 is the size of your portfolio. e.g. if you need 10k a month, then your retirement portfolio must be about 2.4M. this assumes your portfolio generates a 5% return p.a. if your country taxes the income generated from your portfolio, the 10k is then the net disposable income not gross income.

estimating your expenses is tricky:

property related - rates, government rent [taxes], management fee, repairs, utilities etc.

personal - food costs, entertainment [hobbies, eating out, massage], travelling [local and overseas], others [wedding/birthday gifts, clothing].

you may want to mark the total up 10% for margin of error.

portfolio

stocks, bonds, property and cash.

what percentage allocation to each category? a balance portfolio would be 30% each with 10% cash.

if you are overweight in property that generates income monthly, you need less cash and bonds.

stocks should mostly be in utilities and energy related sector.

spending habits

as with most families before retirement, after the mortgage is paid and with two income, eating out a lot and spending freely become a habit. purchases of unnecessary [limited usage or luxury] items usually takes up a lot of the budget when you are still employed.

you must learn to live within your means in your retirement after on a high pay for such a long time. if you cut unneeded purchases and meals in restaurants down to the minimum, your monthly expense need would then be drastically cut.

many of the healthy habits of living do not require a lot of spending such as trail walking or visiting the gym a few times a week. when you spend time on low cost hobbies, you have less time for high cost ones too.

age

a friend who retired at 60 told me that if you can afford it, retire early since he said after reaching his present age of 68, he found that he does not have the vitality he had at 60 and he does not enjoy as much now on food and travel.

well, maybe you feel young at 70, who knows. just some more info to help you decide.

UPDATE released 06 nov 24

usd exch rate

i have maintained in my past updates that usd will not weaken significantly which had been true, but i changed my mind recently on the outlook of usd, it will go south.

reasons?

1. recent movements of many currencies point to a further weakening of usd of 10% plus within a two year or less time frame. the most conspicuous is the aud which formed a round bottom. if it breaks out of 0.78 with follow through, it will hit 0.84.
2. the us m3 money supply is expanding quickly which should not be the case with 17 rate hikes, might be the us govt is printing more money.
3. recent merger & acquisitions volume also suggests there is so much money around probably due to 2 above. the m&a volume is at par with the volume during the era of internet bubbles.
4. stalled [or even -ve] growth in household net worth due to weakening of the housing market does a lot of damage even when stock prices are heading north. most households own a house but not necessarily stocks, the housing market has a stronger effect on consumer demand than the stock market.
5. greenspan evils [23 aug 04 update] - he singlehandedly created the housing bubble which is now leading to a dilemma - control inflation and the bubble bursts which hurts us consumer demand; let inflation off, then usd exch rate dives. it is more likely that the fed has already choosen the later option. us is heading towards a third world mentality, they tried to devalue their currencies to get out of a hole they digged themselves into.

note [for 2] - us federal reserve is not releasing figures on m3 http://www.federalreserve.gov/releases/h6/discm3.htm citing it is not relevant to present monetary policy. recent estimates by finance pros indicate it is expanding at 9%.

goto saxobank.com for exch rates, choose weekly time scale.

UPDATE released 06 sep 16

for many of the past updates that you might have read, i have been emphasizing the impacts of aging on the global economy especially on the developed countries. it has a drag effect on the economy.

now look no further, cover story on businessweek latest issue confirms this trend - read below.

dow jones

its chart shows a rising wedge which predicts falling back to the base of the wedge - the 8000 mark. when and how [meaning what triggers it] is anybody's guess, hold your breath if you are taking chances in the stock market. it may still rally for the last leg up, take this as a sell opportunity instead of loading up more stocks.

us economy

ford, the car company, is planning big layoffs between now and 2008 taking 10k white collar and 30k blue collar jobs off its payroll. this will have multiplier effect on its suppliers, businesses relying on these employees to spend meaning the total payroll affected may be 2-3 folds. why such big layoffs - because of high oil prices and aging. when you retire, you dont tend to buy new cars so often than when you are still young or on the payroll [when you drive more]. if age 60 is retirement age, the first batch of people born right after the war [1945] have become retirees, there will be only more to come, not less.

the housing market is hitting lows with major builders forecasting lower housing starts, more inventory and fewer sales. that is only the start, there are more people who fall behind their mortgage payment for one month or more this year than last. if trends continue, us domestic economy is likely to contract faster than you may think. the housing market has a stronger effect on consumer demand than the stock market.

oil prices

in my 19 jul update, oil was forecasted to retreat and down it did.

look at bp, last time i said 65 is the key support for bp, it reached that support already. the chart shows a head and shoulders formation. if crude has to go lower, watch bp closely for any breakout on the downside below 65. prices of commodity related stock are a good indicator of the trend of that commodity as they usually run ahead of it.

us exch rates

us exch rates have largely remain in trading range except for nzd [nz may raise rates soon]. it may go lower if interest rates fall faster than people's expectation given the weak housing market which will soon impact interest rates decision of the fed.

From Businessweek

What's Really Propping Up The Economy

Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None

UPDATE released 06 jul 19

this is the first update in 2006, kind of late, hey.

real estate

the greenspan era of continuous low interest rates created a pool of hot money stirring up

• real estate;
• stocks;
• commodities.

interest rate hikes will soon or may already have slowed down the real estate market in us real estate. then why is the market not dropping further? when prices tank, speculators got hurt first. us exch rates are now 40% lower than a few years ago, export led growth created strong demand for labor, with employment still growing, mortgage and consumer debt can still be served, thus no widespread foreclosures on residences, it might have happened to properties for speculation only.

however consumer demand is hurt by high gasoline prices and utility bills, the strong growth in us gdp is not translating into consumer demand since national and consumer debt have grown to unseen levels, personal earnings have to plough back into serving mortgage and consumer debt which undoubtedly will affect the export led asian economies.

1-2 years from now, the us economy maybe in a much worse shape since many financial instituions are financing real estate at no down payment [100%], no interest payments [piling interest onto principal not that the FIs absorbed the interest] for the first two years. they will be in for a surprise that the collateral is not worth the P+I two years from now. when they start dumping the properties, widespread decline will occur [usually with unemployment creeping up first and then mortgage payments missed].

oil prices

crude oil hit new highs recently, but not the oil stocks. one of the them is not right:

1. either crude oil has to retreat soon; or
2. price of oil stock will climb higher.

given the current market sentiment and rsi of the oil stocks, option 1 is more likely.

look at bp, 65 is a strong support, if it falls thru this support, oil prices have a lot to fall. the same for exxon at 58.

us exch rate

many economists or forecasters, even warren buffet, argue that us exch rates have to decline. given the already 40% delcine in the past few years against the euro, i doubted that it will go further south and by much. this decline in exch rate increased us competitiveness by a lot and is creating huge demand for labor of export led industries and services, thus the strong employment statistics coming off govt data releases.

it might still go south if the us keep on waging war and building weapons [creating enormous deficits] which is hard to tell given bush policy of favoring oil barrons and the defense industries.

UPDATE released 05 jul 22

RMB appreciation

TIMING - Why end of July?

Just in time for two reasons - firstly, Wu has something in hand on RMB revaluation when he visits USA later in the year, second is to protect small and medium enterprise [esp light industries] on their export earnings which are based in USD as shipping season for Xmas comes to a close around end July. Larger enterprises have to bear the costs of this revaluation.

Why the sudden visit by US treasury officials to China one day after the incident

Apparently, Snow has underestimated the IQs of China's officials in handling the case. They expect easy manuvering like the Japanese twenty years ago. Now with the internet, opening up for 20 odd years and with HK also providing key insights in the intl finance area, the dropping of US as an anchor currency means a rough period ahead for US treasury operations esp long bonds. This change of anchor currency or reference currency however you call it has serious implication for the US. US treasury officials has to redefine their strategy and they want to know more about China's thinking before they map their next moves.

Any more revaluation ahead

No urgency to revalue in 2005 anymore. It will take the heat off until US mid term elections in 2006. A lot of factors such as oil, interest rates, exch rates of US with other currencies will have a compound effect on whether RMB will appreciate further. If the US economy keeps growing slowly without a recession, the pressure is less on RMB to appreciate and vice versa.

UPDATE released 05 jun 10

stock market at crossroads

ever since my earlier update that stock market is going nowhere mainly because of aging and a number of other factors. i have forgotten to include another key factor especially regarding the us market. usually when govt runs deficits, the economy should be much stronger when businesses are not contracting, why is it not then. the key factor lies in how you spend your deficits - weapons building and war [we shall name it wbw]. wbw will not recylce anything back to the economy. rusty weapons have to be destroyed and replaced with no final consumers indeed.

deficits created by wbw will not benefit the economy as can be illustrated by history. wbw actually destroyed ussr - if you still remember what that is. ussr engaged in war with afghanistan in 80 thus the olympics boycott, it fought on for ten years and was left with no foreign reserves to back its govt, thus the dismantling by itself of a once great communist empire.

remember the 90s when stock markets roared. the berlin wall fell in 90 and the peace dividends started kicking in. then you saw a roaring market when the us govt exercised discipline in spending.

euro

it will distinctly go lower as gobalization is impacting all of europe's more socialistic governments. welfare goes up, spending goes up, deficits go up. without major restructuring of labor and govt spending, it will only go lower until us starts their own program to devalue their currency through lower rates thus expanding money supplies.

oil

will oil go higher? it is hard to tell right now. in the medium term - a few years time, it is a definite yes, however, it might not in 2005 - why?

when crude oil reserves in the us are going much higher than the past few months, prices of it is also going higher [close to its peak] which does not seem right. also other commodities and gold are not close to their peaks. is there a manipulation of prices so some funds or govts can unload in the futures market their long positions or building up short positions with favorable prices.

remember the cao singapore incident, cao built up a large short position only being squeezed to liquidation [crude oil prices went thru the roof in oct] with margin calls and reported usd550m losses in trading [in nov]. this is an incident that major market players were aware of short positions kept by an amateur player suffering heavy losses so they collude to squeeze the last drop of blood from this player.

if crude oil forms a double top, it might go back to mid 30s during 2005.

UPDATE released 05 apr 4

hang seng

it looks like that a double top formation is in process, beware that it will fall to 12700.

oil prices

it has already hit the 58 barrier, it may try again or breaks it temporarily, there is no indication this will follow through to higher prices.

it will halt climbing for a while, very much like the currency euro which has been in trading zone for a while already.

aging

population aging may already be haunting us with the dow jones going nowhere [read update of 23aug04].

UPDATE released 04 aug 23

if you have received my updates since april, the oil crisis should be no surprise and was anticipated months ago.

greenspan's evils

years ago i was also a fan of mr greenspan, not anymore. his recent mistakes are numerous:

- supporting every bursted bubble

• internet
• ltcm
• russian debt crisis
• property and bond [both markets are about to burst]

- kept interest rates artificially low in order to keep demand high

- kept interest rates low for too long

by not letting the markets correct themselves and playing tricks of god, he created unneeded demand and thus the recent oil crisis.

hongkongers know too well that deflation is a hole difficult to climb out of, however, stagflation hurts all levels especially the very poor - except maybe the oil barrons. since the price of subsistent goods [food and fuel ie bus/train fares] keep on rising, it becomes ever more difficult for the very poor to stand on their feet.

we have to bear in mind that power corrupts and it happens to greenspan too. he enjoys the command and respect attributed to his position as fed chairman and has held on to power for too long. no us president or cabinet posts last longer than two to three terms and greenspan survived more than four presidents. after one has been in power for too long, he just wouldnt quit on his own unless his health cannot afford to.

stock markets

recent trends indicate that both european and us markets are trading lower unless the markets got momentum to rise at least 10% above recent trading ranges ie dow trades above 11,000, hang seng above 13800, i could not see any major uptick in many markets.

gold

watch out this indicator if it trades and stays above 430, then inflation is really picking up and stock investors should panic.

UPDATE released 04 apr 23

you get more frequent updates now that i am not a corporate slave.

currency

most currencies that appreciated 40% plus in the past year have lost their allure in the last few weeks. those of you who short against euro should have reached their target profits if not more.

stocks

almost all indexes go south since my last update, you will be better off owning stocks that have low p/e as suggested in the last update than those with higher ones.

oil price

the worrying trend is that the oil price is at an all time high and it has been staying up there even after the winter. technically, prices can reach the 50s if it doesnt ease soon. every economy will then be thrown into a nightmare at such prices with higher interest rates.

UPDATE released 04 mar 16

it has been some time since the last update which was way back in 2003, the reason for this long overdue update is because i was overloaded with work.

stocks

for those who have treaded the utility CLP should have gained tremendously captial wise and from dividend.

if you have not taken any positions so far, avoid those that have gained 30-40%, look for stocks with p/e around 10-13 not more.

for your information, usa will have 100m in population aged 60+ in 10 years time, do you think the stock market has any chance to break further ground within this 10 years? hold your breath, i guess not more than one boom.

currency

some of you have already been advised, euro will decline significantly from top 129 to 119 in the short term and possibly lower at 115/6 in the medium term.

china

the challenges it faces are huge:

• great divide - china's great divide is even greater because of corruption.
• squeezed margins - wofe and soe are being squeezed at both ends, the inflexibility in pricing from customers plus the increase in material prices. the pricing power is eroded by the great divide [read attachment] while the only way to cut costs and improve margin is to cut costs of labour. such cutting will inevitably cause social problems. chinese workers being the most industrious workers in the world and further pressure on them can cause factory unrest.
• weak state banks - outsiders estimate of NPL is in the range from 40-60%, it does not pose any problem now because rmb is gaining greater acceptance in the peripheral countries that her citizens visit. this in turn encourage their citizens to keep their savings in rmb instead of foreign currencies.
• the trade deficit - china is used to trade surpluses, however, the jan/feb figures show that it runs huge trade deficits. if this trend continues, yuan will be under pressure to devalue and forcing the NPL problem into the open.

real estate

many markets here or overseas have seen big runups, these runups will not turn around so soon, they will only turn around and go south when the stock markets are hit by withdrawals from the aging population when they retire or are short of resources because of dwindling current income. that does not mean you should go after real estate at all costs though prices do go up, it might be difficult to unload once any downturn materialized which can be forthcoming within the next few years. trying to guess the top is extremely dangerous as experience in HK tells you that unloading in a difficult market means marking down by 8-15% which most people would not dare to do so until they realized that it is too late.

The Great Divide released 04 Mar 16

Science Fiction

You might have read science fiction or watched movie that ordinary people are governed electronically all year round and an elite class enjoying special privileges. Read on.

The Four Indirect Causes

Aging – The baby boom has entered their middle age and beyond thus having to save both for retirement and children education thereby reducing aggregate demand of the whole society.

Globalization – This trend is not helping the middle class either and has marginalized many professionals whose expertise can be transferred overseas to reduce costs. The vicious circle continues as income from professionals decline, corporate profits decline too.

Technology – The tech trend ever since the personal PC invention was being popularized in the 1980s and continuous improvements in telecommunications such as mobile technology, fiber optics, broadband etc have contributed to less demand for manual or even professional labor.

911 – The incident has triggered losses of jobs and an era of low interest rates not seen for decades. Retirees and potential retirees are hit from all sides – unemployment as well as the lowering of returns from their investments.

The Pressure on Profits

All of the above contributed to lower demand thus fewer jobs and are putting pressure on profits for a large number of corporations. Those sizable enough are increasingly pursuing their profits from the inside track i.e. taking advantage of government. In doing so, government revenue is suppressed, contract costs increase and government in turn has to raise fees and/or taxes from the middle class.

Just to cite two examples – one in Hong Kong and one in the US.

Hong Kong – The sale of a few apartment blocks under the homeownership scheme to New World was meant to support the market. NW set to gain tremendously from the deal.

US – Many corporations linked to Dick Cheney got huge contracts during/after the Iraq war from the US government without going through the usual bidding process.

This is now happening here in Hong Kong and elsewhere in the world. A decent job is difficult to find while a host of senior civil servants or senior management from private sector are enriching themselves like never before thus creating The Great Divide.

UPDATE

hi guys,

if you are one of my friends receiving from time to time my email with subject UPDATE [of current finance trends], you can read future ones from here.

i will post the past updates here on a selective basis since the blog allows only 500 words.

why happy six

do you know why the blog is named happysix. a survey of adults indicated that only 6% of people said they are happy. so when you view this blog, you should be one of the 6% and stay that way the rest of your life